A new perspective: investment and efficiency under incentive regulation

Following the liberalization of the electricity industry since the early 1990s, many sector regulators have adopted incentive regulation aided by benchmarking and productivity analysis. This approach has often resulted in improved efficiency and quality of service. However, there remains a growing concern as to whether the utilities invest sufficiently and efficiently in maintaining and modernizing their networks. This article discusses the relationship between investments and cost efficiency in the context of incentive regulation with ex-post regulatory treatment of investments, using a panel dataset of 129 Norwegian distribution companies from 2004 to 2010. The authors introduce the concept of ‘no-impact efficiency’ as a revenue-neutral efficiency effect of investment under incentive regulation that makes a firm ‘investment efficient’ in cost benchmarking. They also estimate the observed efficiency effect of investments and compare these with the no-impact efficiency. Finally, they discuss the implications of cost benchmarking for the investment behaviour of network companies.

Poudineh, R. and Jamasb, T. (2015). ‘A new perspective: investment and efficiency under incentive regulation’, Energy Journal, 36(4), 241–263.

By: Rahmat Poudineh , Tooraj Jamasb


Journal Article